Keeping control of the wheel during tough financial times

As shipping companies and the offshore oil services industry feel an increasing financial squeeze, management teams need to take proactive action to keep control of their future.

The offshore oil services industry, for example, has been under pressure since the collapse in the oil price, enduring low charter rates. That pressure will only increase following Iran’s agreement to curb its nuclear programme in return for the removal of sanctions. Crude oil from Iran is not expected to flow freely for several months, but when it does the offshore industry will face even greater challenges in meeting existing debt obligations and conserving cash. Offshore oil services companies would be well advised to take a close look at the options available to them before creditors start taking action for themselves.

In a distressed market, a shipping company’s primary objectives should be to preserve cash and, if necessary, restructure its borrowings so lenders can see that debt will continue to be serviced in some form. Companies often react too slowly and, as a result, the banks seek to take control of the situation by forming committees (in club deals) or appointing a Chief Restructuring Officer at the expense of the borrower.

If a company wants to stay in the driving seat it must make the first move. The executive management may not have the capacity to manage a debt restructuring as well as running day-to-day business operations. So companies are advised to seek out appropriately qualified professionals to work alongside the executive management to lead debt restructuring negotiations. This approach is not only cheaper for the company, preserving cash, but also more likely to result in a restructuring plan the company can realistically meet. Working with a bank to present its credit committee with a potential solution, rather than a problem, is also more likely to engender a positive attitude to any restructuring.

Businesses must prepare thoroughly before any meetings with banks and other lenders. You must be able to produce properly documented and timely financial information for your stakeholders, including a view of the future. In good times, when charter rates exceeded operating expenses, little attention needed to be paid to future cash flows and debt service. But today it is essential to be able to anticipate, as far as is possible, future cash flows and pinch points.

Success depends on having a proper financial model. Financial modelling is a key component of any renegotiation of facilities. A viable model, typically including an integrated balance sheet, profit and loss account and cash flow statement, can help to support a restructuring proposal, by demonstrating the impact of changes on future cash flow. Financial modelling doesn’t change the economic fundamentals of a business, but it is a tool for identifying ways to manage the impact of a volatile market. A good quality financial model is also an invaluable ongoing management tool. It can be used to assist in making longer-term strategic decisions and help to determine the nature and structure of future investments and the potential returns on investment.

Moore Stephens has extensive experience in the shipping and offshore oil services industries and has acted for many international clients providing valuable restructuring advice and leading complex negotiations with creditors. If you would like to know more about how Moore Stephens can help your business, please contact one of the team.